INFOMACRO Sintesi della relazione

Final Report Summary - INFOMACRO (Information Heterogeneity and Frictions in the Macroeconomy)

Lack of information or access to differing sources of information is a basic fact of life. This project has analyzed the impact of such dispersed information on the functioning of financial markets and macroeconomic outcomes. First, the project has developed a theory of how dispersed information leads to asset price fluctuations that are disconnected from the underlying fundamental values. Lack of information can thus contribute to resolve some known asset pricing anomalies. Moreover, the mis-pricing of financial securities results in excess market sensitivity of risk-taking and investment decisions, thus offering a new rationale for regulatory intervention at the micro level, and a new theory for volatility of consumption, investment or borrowing-lending decisions in the aggregate. Second, the project has explored to what extent information frictions influence macroeconomic adjustment dynamics. A series of papers shows that goods markets often are remarkably robust to lack of information – often resulting in efficient price adjustment even if information remains highly incomplete. These results qualify earlier work suggesting lack of information as an important source of sluggish price adjustment in the aggregate. Third, the project also analyzed firms’ reputational incentives to invest in product quality, when the latter is only imperfectly observable. We show that these incentives are too weak to discourage inefficient market entry by low quality producers, and argued that this offers a rationale for restrictions to firm entry.